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Tax planning moves before year-end — and all year round

Dec 15, 2023

With 2023 coming to a close, take advantage of tax-saving measures to lower your upcoming tax bill before December 31. Here’s a rundown of key tax-saving opportunities.  

Deduction planning

Itemized deductions must exceed the standard deduction to maximize the tax value of the deductions, so planning is important. For 2023, the standard deduction is $27,700 for married filing jointly; $13,850 for single or married filing separately; and $20,800 for head of household.

To maximize the benefits of the standard deduction and itemized deductions, consider adjusting the timing of deductible expenses (i.e., “bunching,” so that they are higher in one year and lower the following year). This can be accomplished by paying deductible expenses in 2023, such as mortgage interest due in January 2024, or doubling up on charitable contributions every other year. Bunching medical and dental expenses in one calendar year also can help maximize the allowable deduction.

Consider making charitable contributions by the end of 2023 using a credit card, if the bill will not have to be paid until 2024. Potentially donate appreciated property to charity rather than selling it, especially if doing so may result in overall itemized deductions exceeding your standard deduction for 2023.

Deferring or accelerating income

If you expect your AGI to be lower in 2024 than in 2023 or anticipate being in the same or a lower tax bracket in 2024, you may benefit by deferring the receipt of income until 2024.

If you are self-employed (e.g., as a sole proprietor or single-member LLC) and operate on a calendar year and cash-basis accounting method, consider delaying 2023 year-end billings to clients so payments will not be received until 2024.

In limited circumstances, you may benefit by accelerating income into 2023. For example, if you anticipate being in a higher tax bracket in 2024 than in 2023 or need additional income in 2023 to take advantage of an offsetting deduction or credit that will not be available in future tax years, it may make sense to accelerate the receipt of income. Some ways to accelerate income into 2023 include:

  • Year-end bonuses: If your employer generally pays year-end bonuses early in 2024, see if you can have your bonus paid before the end of 2023.
  • Retirement plan/IRA distributions: If you have attained age 59 and a half and participate in an employer retirement plan or have an IRA, consider taking any taxable withdrawals before 2024.
  • IRA conversions: Consider converting all or a portion of a traditional IRA to a Roth IRA.

Investments

The timing of your investment activities can result in significant tax consequences. When planning investment activity in 2023,  you may have capital loss carryovers from your 2022 tax return. The following general rules apply for most capital asset transactions in 2023:

  • Capital gains on property held for one year or less are taxed at an individual’s ordinary income tax rate.
  • Capital gains on property held for more than one year are taxed at more favorable capital gains tax rates (0%, 15%, 20%), depending upon your regular income tax bracket.

Consider tax-loss harvesting. Capital losses may be fully deducted against capital gains and offset up to an additional $3,000 of ordinary income ($1,500 for a married individual filing separately).

Note: If you sell stock at a loss, you must wait 31 days before repurchasing the same stock. Otherwise, the wash sale rules apply, disallowing the loss.

Sale of principal residence: The tax code recognizes the importance of home ownership by allowing you to exclude gain when you sell your main home. However, you can only exclude a maximum of $500,000 if married filing jointly and $250,000 for all other taxpayers.

Qualified Opportunity Funds (QOFs): Anyone who invests in Qualified Opportunity Zone property through a QOF within 180 days of realizing a gain can temporarily defer tax on the amount of eligible gains if they invest and, in some situations, can permanently exclude 10% or 15% of invested eligible gain.

Exclusion of gain attributable to certain small business stock: A full 100% of the gain on the sale of small business stock under §1202 is excluded from income. The stock must be held for more than five years to qualify for the exclusion. (If the stock was acquired on or before September 27, 2010, other less favorable exclusion rules apply).

Energy tax credits

Residential Clean Energy Credit: For 2023, a tax credit is available to homeowners and tenants who install certain energy-efficient properties on their residences:

  • 30% credit of the cost of qualifying property installed in 2023 on solar panels, solar water heaters, geothermal heat pumps, wind turbines, fuel cells and battery storage technology with a capacity of at least 3 kilowatt hours.
  • Fuel cell property is limited to $500 for each half kilowatt of capacity. If more than one person lives in the home, the combined credit for all residents is limited to $1,667 for each half kilowatt of fuel cell capacity.

These credits are nonrefundable, so they’re limited to the amount you owe in taxes. However, you can apply any unused credit amount to reduce the tax you owe in future years.

Clean vehicle credit: A tax credit may be available if you purchase a plug-in electric motor vehicle or a fuel cell motor vehicle, and it is delivered to you in 2023. The maximum credit allowed per vehicle is $7,500. The credit is available to individuals and their businesses. Eligible vehicles include passenger automobiles, vans, sport utility vehicles and pickup trucks.

Used clean vehicle credit: If you buy a qualified used electric vehicle or fuel cell vehicle from a licensed dealer for $25,000 or less, you may be eligible for a used clean vehicle tax credit. The credit amount is 30% of the sale price, up to a maximum credit of $4,000. The credit is nonrefundable, so it is limited to the amount you owe in taxes, and you cannot apply any excess credit to future tax years.

529 qualified tuition plans: Many states allow for a deduction or tax credit per beneficiary for contributions to that state's 529 plan. 529 plan distributions may be made tax-free for elementary and secondary tuition of up to $10,000 per year per student. Such plans also may be used to pay up to $10,000 of student loans per beneficiary.

Annual gift tax exclusion: The most common method used for tax-free giving is the annual gift tax exclusion, which, for 2023, allows a person to give up to $17,000 per recipient without reducing the giver’s estate and lifetime gift tax exclusion amount. A person is not limited to the number of people to whom he or she may make such gifts.

Retirement planning

If you are not contributing the maximum amount permitted to your 401(k) account for 2023, you still have time to increase contributions for the remainder of 2023. Maximizing pretax retirement contributions is a good tax-saving move.

Traditional IRA: Individuals who are not active participants in an employer retirement plan may make deductible contributions to an IRA. The deadline for 2023 contributions is April 15, 2024. The annual deductible contribution limit for an IRA for 2023 is $6,500. An additional $1,000 catch-up contribution is allowed for taxpayers who are age 50 or older.

Roth IRA: This type of IRA allows individuals to make nondeductible contributions of up to $6,500 ($7,500 if making a $1,000 eligible catch-up contribution) for 2023. Earnings grow tax-free, and distributions are tax-free after the individual has reached age 59 and a half. If your income is too high to make a Roth IRA contribution and you do not have a traditional IRA, you can establish a traditional IRA and make a nondeductible contribution. You can then convert the traditional IRA to a Roth IRA. Note, if you already have a traditional IRA, SEP or SIMPLE plan, there may be tax consequences with this strategy, so don’t make a move in this area without consulting us.

401(k) plans: The 401(k) elective deferral limit is $22,500 for 2023. If your employer’s 401(k) plan allows for catch-up contributions for 2023 and you reach age 50 by December 31, 2023, an additional $7,500 may be contributed.

SIMPLE plan contributions: The SIMPLE plan deferral limit is $15,500 for 2023. If your SIMPLE plan allows for catch-up contributions for 2023 and you will be 50 years old by December 31, 2023, an additional $3,500 may be contributed.

IRA required minimum distributions (RMDs):

If you turned 72 in 2022, you should have taken your first RMD by April 1, 2023, and would need to take another one by the end of 2023. Due to a change to the age when you must start taking RMDs, if you turn 72 in 2023 you won’t have to take an RMD until 2024 (when you turn 73), and the first must be taken by April 1, 2025.

IRA donations to charity: If you are 70 and a half or older, you can make direct contributions from your IRA to a charity of up to $100,000 during 2023, but you can’t claim a charitable contribution deduction. Conversely, these amounts are not included in your taxable income and can be used to satisfy your RMD.

Qualified business income deduction (QBI deduction): Individual taxpayers with qualified business income from a pass-through entity (partnership, S corporation, LLC or single-member LLC) or a sole proprietorship may be entitled to a deduction of up to 20% of their qualified business income. For 2023, if taxable income exceeds $364,200 for a married couple filing jointly (about half that for others), the deduction may be limited. The QBI deduction rules are quite complex, so consult an experienced advisor to help ensure you can maximize this deduction. 

Depreciation and Section 179: If you are in business and purchase equipment, you may depreciate such equipment or make a Section 179 election, which allows you to expense the property immediately. For 2023, the allowable deduction is up to $1,160,000, although some limitations apply.

Bonus depreciation: Business or investment property placed in service in 2023 may be eligible for an 80% bonus depreciation deduction. The bonus depreciation rate will decrease to 60% for property placed in service in 2024. To take advantage of this deduction, individuals engaged in a business may want to consider accelerating the placing in service of property in the business before the end of 2023.

SEP IRA contributions: For 2023, self-employed individuals generally can make a SEP contribution that cannot exceed the lesser of 25% of compensation or $66,000.

Employing family members: Consider hiring your spouse or children to work in your business. In addition to being able to deduct wages paid to a family member as a business expense, a key tax benefit is that any child, regardless of age, can contribute to an IRA provided they have earned income. Your children can also contribute to a Roth IRA.

How Wipfli can help

Wipfli’s team is able to help you take advantage of last-minute tax moves and other planning decisions before the December 31 deadline and all year round. We engage clients in deep conversations to understand objectives and goals and can assess whether your current plan is on the right trajectory for you and your family.  We can help you gain confidence in the economic and tax consequences of your investment, business structure and wealth transfer strategies. Learn more about our services.

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Author(s)

Jason Grunlund, CPA
Manager
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